Why I Wouldn't Build Homes in Ireland

But that snake – rising interest rates – is there nonetheless.

It may already be starting: the women in my family report that today at Brown Thomas (the fanciest store here) the first floor – with the cosmetics – was very crowded. But the second floor – the designer clothes and other higher priced items – was nearly empty.

I recently spent a week in Ireland. It's a wonderful country filled with great people. Moreover, it has been enjoying an economic boom over the past 15 years or so that is absolutely unprecedented.

The transformation has been astounding.

Their timing of this boom has been great, coming alongside of the formation of the European Union. Not only has the EU generously given money for infrastructural improvements, the free trade zone Europe and much of the world has become, has clearly benefited Ireland. The country exports more now in a single week than it did in a typical year during, say, the mid 1980s.

But there is another development that I want to concentrate on. It is the interest rate angle. Before Ireland joined the euro currency a few years ago, its own currency had fairly high interest rates. With the euro, this changed.

Interest rates on the euro were as low as 2% for much of the time since 2000. To me it is clear that for Ireland, at least, interest rates like this were artificially low. And whenever this happens, borrowing goes wild. The average person was able to borrow money for next to nothing, and they did.

Certainly, some of the new money went into economic improvements. But much of it went into real estate. Property prices rose so high that they are now on average 15% above prices in Great Britain. And if you are familiar with UK real estate prices, you'll grasp the enormity of that statement.

Moreover, in Ireland over 75% of all consumer and mortgage debt is "floating": the interest rate on it is not fixed and it can rise. This is in marked contrast to other European countries, like France and Germany, where at least 70% of mortgage debt is fixed for a period of years.

This means that loans acquired at just 2% a couple of years ago are now being serviced at 4%. The monthly 'nut' has doubled for many. And since in my view Euro interest rates are not done rising – not by a long shot – the pain is just starting.

I would not want to be in the homebuilding business in Ireland. Traveling as we have throughout the country, we've seen new housing developments being built everywhere. This is of course an expected result of seeing house prices rise so much: people rush in to provide more of it. But the amount of new housing you see is amazing. I've seen estimates that the amount of housing starts is 26% above sustainable levels. It may even be higher. Construction-related employment is up an extraordinary 40% over year ago rates. Irish bank lending for real estate now amounts to nearly 65% of all loans.

It's as if everyone is rushing in to get the last crumbs of the boom.

Clearly, Ireland has some great fundamental things going for it. The decades of stagnation meant that few new houses were built, so this is in some measure just a catch-up. Further, unlike many countries, Irish government debt is very low, at just 5% of GDP.

Yet if you factor in a new, rising trend of interest rates, the picture does not look as rosy. I don't care who you are... if you have contracted debt at 2% and the rate then rises to 4%, or 5% (as it may by the end of the year) – then you've got costs you probably hadn't counted on or prepared for.

Economic growth in Ireland, so impressively high in recent years, is certain to slow down. It may stop entirely.

Why is Ireland important? For me, a place like this is another canary in a coalmine of a new trend of rising global interest rates. The effects of this new trend will be felt sooner in Ireland (or Spain, another country where artifically low interest rates have caused overbuilding) than they will be felt in say, Holland or Germany... and we ought to pay close attention.

Good investing,